I’m sure most of you are familiar with the tried-and-true summer activity of the Slip’N’Slide. You drag it out to the closest thing to a hill in your backyard, and unroll it for the first time since the prior summer. Twenty-some feet of yellow plastic, a garden hose clipped along the top edge, and a thin seam of water running down the middle. Maybe somebody adds a few squirts of dish soap, because why not. The first kids start sliding down in about two seconds and come off the end laughing.
But then they try to walk back up, and you already know how that goes. The moment you plant a wet foot on wet plastic on a hill, you are not going anywhere except back down on your stomach. The grade barely matters going down, but going up, it is everything. It doesn’t take long, though, for the kids to figure out that the only way to the top is the strip of dry grass along the edge, but even that doesn’t last all day.
Interestingly, that is roughly the design of American tax policy. And on November 3, Californians will vote on Proposition 40, a one-time 5% levy on the net worth of the state’s billionaires, somewhere between 200 and 250 people depending on the count, aimed mostly at a hole in state healthcare funding. It was written and bankrolled by a healthcare workers’ union, while the opposition campaign is bankrolled largely by billionaires. And this past weekend the state Democratic Party endorsed it over the objections of Governor Gavin Newsom and the state teachers’ union.
I do not live in California, and neither do most of you. The interesting part here is not whether 250 people can afford to write a large check, because they probably can. It is the phrase “one-time,” and whether that phrase has ever survived a prolonged encounter with a government budget.
The First Run Was Supposed to Be the Only One
The federal income tax was born from war. In 1861, needing to fund the Union effort, Congress passed a 3% tax on incomes above $800. It was framed as an emergency measure, and for once the framing held. The tax lapsed in 1872 and the federal government went back to living on tariffs, which remains the only time in American history that anyone successfully carried this particular thing back up the hill.
Congress tried again in peacetime with the 1894 Revenue Act, a 2% tax on incomes above $4,000. The Supreme Court killed it the following year, ruling that taxing income was a “direct tax” that had to be apportioned among the states by population. This would have required each state’s share of the tax to match its share of the national population, rather than its share of income, which killed it before it got started.
And that could have been the end of it. However, it started the path to a workaround, which arrived in 1913 as the 16th Amendment and rolled the plastic back out. Of course, the pitch for the new tax was modest. A top marginal rate of 7%, applied to income above $500,000 (call it $15-plus million in today’s money). The exemption was $3,000, which meant only about 350,000 returns were filed in the first year, somewhere around 1 to 2% of American households. Most families never filed anything and never expected to. But five years later, the top rate was 77% (whoops), and returns had jumped to roughly 4.4 million, or about one household in five.
Nothing had changed legally, yet still, the groundwork had been set, and the water was still flowing down the hill. The 1930s pushed it higher to fund the New Deal, and the Second World War finished the job, converting what was a class tax on only the very wealthy into a mass tax. And it was in 1943 that income tax withholding emerged, the dish soap in this metaphor. It is the single most effective piece of tax engineering in American history precisely because it removes the friction, and it removes it in the one place a taxpayer would otherwise feel it. Money you never touch is money you do not miss.
The Same Pitch, a Century Later
Which brings us back to California, because the pitch for Prop 40 has the same shape as the pitch from 1913. A narrow base, a modest-sounding number, and a purpose almost nobody would argue with: two hundred fifty people, five percent, one-time tax to help pay for health care.
The mechanics look simple enough on the surface. If your net worth is over $1 billion, you will be taxed, calculated on your worldwide assets. There is a phase-in, which looks a lot more like a cliff than a ramp. The rate starts at 0% at exactly $1 billion and scales linearly to 5% at $1.1 billion, so a taxpayer at $1.02 billion owes 1% and one at $1.06 billion owes 3%. Fine. But at $1.1 billion, the full 5% applies to the entire net worth, which is a bill of roughly $55 million. Somewhere inside that hundred-million-dollar band, a single day’s move in a single holding is worth tens of millions in tax, decided by a closing price on New Year’s Eve.
There are reasonable carve-outs, and the drafters deserve a small amount of credit here. Your primary house does not count. Neither do pensions or standard retirement accounts, and you can exclude up to $5 million of cars, art, and general personal property. In addition, while the tax is technically due in 2027, you can spread it over five years in 1% annual installments for a modest deferral charge.
Three Dates Doing the Work
In addition to the technical details, three specific dates are incredibly important. Residency is fixed as of January 1, 2026, which had already come and gone before the measure even qualified for the ballot in June. That is the “anti-flight” provision, and it functions by making the trigger retroactive. You cannot leave now to avoid it.
Net worth is then measured on December 31, 2026, a full year later. So the liability floats on twelve months of markets that nobody in the base can opt out of, and it settles on whatever the last trading day of the year happens to look like.
And then there is October 15, 2025, which is even more clever. Any outright gift over $1 million made after that date is added back to your net worth for the calculation. The measure reaches backward past its own residency date to catch anyone who saw this coming and started handing assets out the door. Trusts get the same treatment, only more aggressively. Grantor trusts count in full. One hundred percent of anything transferred into a non-grantor trust during 2026 comes back, along with 75% of 2025 transfers.
The Founder’s Problem
But what about founders whose wealth is locked up in a private company they started? Well, they’re allowed to defer further and pay as they actually liquidate or take distributions. But that says nothing about possibly the most difficult part of the process with wealth taxation: how do you price something nobody has sold, can’t easily sell, and probably doesn’t want to sell? Prop 40 does not pretend appraisal will work, so it overrides it. Minority interest and marketability discounts, the two standard tools for valuing a stake in a private company, are prohibited, and a partial stake is valued as a straight pro rata share of the whole business.
They go on to say an asset cannot be worth less than the amount you insure it for. Any recent funding round sets a floor. And by default, a private business is valued by formula: book value plus 7.5 times average annual book profits over the prior three years, multiplied by your ownership percentage. Set aside whether 7.5 is the right multiple because it can’t be for everything. The formula doesn’t really have to be “right,” it just needs to be there, a number that will set the precedent.
It does create a particular kind of problem, though. A billionaire holding Microsoft shares has a price on a screen and a deep market to sell into. A founder with most of his wealth inside an operating business has a tax bill denominated in dollars and an asset denominated in a formula, one that specifically ignores the discounts that exist precisely because a minority stake in a private company is hard to sell. The installment and deferral provisions soften that, but they do not change the fact that California has now written down a workable statutory method for putting a number on a private business. Formulas, once written, tend to get reused.
Nobody Walks Back Up
Perhaps the scariest thing for Californians is that Prop 40 does not just impose a tax. It amends the California constitution to strip out the existing 0.4% cap on taxing intangible personal property. That cap is the strip of dry grass along the edge of the Slip’N’Slide. It is the footing, the reason today’s argument is about whether a state can tax wealth at all rather than about what the rate should be. Roll the plastic over it and every future version of this debate starts from a different place, and a much easier one to win.
None of this means Prop 40 will pass, or that even if it does, it will survive the lawsuits that will inevitably follow. The constitutional arguments are serious, but they are well outside my expertise. I have no idea how they will resolve it if it comes to that.
But the question in front of a California voter is not whether a few hundred people can absorb a 5% haircut, because purely from a wealth perspective, I think you’d find very few people who would say they can’t. The question is whether “one-time” describes the tax or just the sales pitch, and the American record on that is a long list of temporary measures that are not only still in place, but that have expanded massively. Remember, once the Slip’N’Slide is out, the water is flowing, and the soap has been squeezed, it’s pretty hard to make it back to the top of the hill.
Markets / Economy
- It was an absolutely huge week as markets pumped to highs after they digested the major volatility from the prior week’s fund blowup. The S&P finished the week up 3.6%, the Nasdaq up 5.2%, and the small-cap Russell 2000 up 3.5%.
- JOLTs job openings in the U.S. decreased by 178K to 7.36 million in June, below market expectations of 7.40 million.
- The U.S. economy unexpectedly shed 23K jobs in July, following a downwardly revised 20K gain in June and compared to forecasts of an 80K increase.
- The U.S. unemployment rate dropped to 4.1% in July, down from 4.2% in June and below expectations, as many people left the workforce. The labor force contracted by 264K to 169.1 million, with the participation rate falling to 61.4%, its lowest since early 2021.
Stocks
- U.S. equities were in positive territory. Technology and Materials were the top performers, while Energy and Utilities lagged. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased 10 basis points to 4.65% during the week.
- Global bond markets were in positive territory this week.
- Government bonds led for the week, followed by corporate bonds and high-yield bonds.
